One of today’s trends to solve this problem is outsourcing logistics or using third-party logistics (3PL) to manage complex distribution requirements.

Organizations have developed strategic alliances with 3PL companies all over the world to manage their logistics operations network. These alliances are also known as supply chain partnerships or contract logistics (that is Exel’s preferred category).

Levels of Outsourcing

• Transactional: Based on transactions, with no long term contracts and no bonding between the 3PL and the outsourcing company. Carrier affiliated organizations are common in this sector.
• Tactical: Outsourcing on a long term basis with negotiated contacts and integrated IT systems to facilitate free information flow and create supply chain visibility (The goal should be fiscal visibility, within the supply chain).
• Strategic: Based on long-term relationships with successful outcomes, 3PL companies become partners in supply chain management and establish transactional transparency in all facets of the international supply chain.

Why Choose to Partner with a 3PL?

• Save Time: Outsourcing the Logistics function can free up resources to focus on core competencies.
• Because Someone Else Can do it Better: Even if you have resources available, another organization within the supply chain may be able to do it better, because of its relative position in the supply chain, or they have a certain supply chain expertise, and the 3PL may have economies of scale.
• Share Responsibility and Risk: 3PL’s can share responsibility (and risk) for managing global supply chains, keeping customers and stores properly stocked, and delivering the perfect order every time.
• Re-Configure Your Distribution Network: 3PL outsourcing can be a quick way to re-configure distribution networks to meet global market demands and gain a competitive edge.

3PL Partnerships Are Growing

According to a 2005 Cap Gemini study, North American organizations planned to outsource 56% of their logistics expenditure by 2006 – 2008, with Western Europe planning 81% and Asia-Pacific 60%. The same report revealed that 78% of the respondents are outsourcing logistics activities in North America; 79% in Western Europe and 58% in Asia Pacific.

These organizations are outsourcing logistics activities and upgrading relationships with 3PL companies from transactional, to tactical and strategic relationships.

According to a 2005 survey, CEOs of 3PL companies operating in Asia-Pacific expected 17% average business growth over the upcoming three years.

Achieving Strategic Outsourcing

Unfortunately, only a few 3PL companies achieve strategic status with their customers. Exel is one of them. It is done by constantly innovating and maintaining operational integrity. Some use an open-book costing method to demonstrate their system’s transparency, which is being embraced by many Fortune 500 companies.

If you are planning on implementing a 3PL partnership, read my tips about how to implement a 3PL game plan successfullythere are plenty within my blog from 2006 and 2005.

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Michael Stolarczyk is currently Senior Director, of Business Development for Exel in their Westerville, Ohio General Office for the Americas. He is also on the Board of Advisors for West Virginia Universitys School of Business.

Michael’s Blog: http://blogonlog.blogspot.com

That’s a decision many companies are analyzing as they face high fuel and transportation costs, as well as congestion at larger ports. Choosing an inland port may not work for every company, but it can help achieve greater supply chain management success through the use of multiple transportation modes.

Here are his 10 tips for evaluating inland ports.

1. Consider your transportation needs. How do you ship your product? Do you use rail, road, water, air, or a combination? See if the inland ports are well-connected to these transportation modes. For instance, consider how far the port is from the airport or railway. Align your needs with the port’s location.

2. Do a transportation analysis. Calculate what you spend now, then project what it would cost to use barge in an inland port system. Moving inland and shipping via barge could save money in the long run. In addition, check out the carrier service offered at the inland port. What kind of barge lines or short-line railroad carriers operate from the port you are considering? Evaluate the carrier service the port offers, whether you have contracts with those carriers, and if they can meet your freight handling needs.

3. Analyze the port’s location. Understand the markets you serve and if the port is within close proximity to those markets. Get to know how the port’s location can offer both north-south and east-west transportation options. If the port is located along the Inland Waterway System, for example, does it provide access to both the Gulf and the Great Lakes? Does it offer access via road and/or rail to the increasingly popular north-south NAFTA corridor? The inland port could also offer important east-west connections that give your business access to booming coastal freight activity.

4. Check out the financial incentives. Many inland ports are attracting business through incentives. Find out if the city or port offers attractive lease rates, bonding ability, or Foreign Trade Zones. Such incentives might make choosing an inland port a good business decision.

5. Make sure the inland port can meet your delivery needs. If you run a just-in-time inventory operation, you need to be particularly sensitive to the fact that it could take additional efforts to schedule product inflow and outflow, especially if you use barge transportation. Shipping via barge means you most likely will use several lock and dam systems, which will translate into slower transportation times, despite cost savings. Carefully plan your inbound and outbound transportation. Consider how critical timing is for your operations. How will your delivery method affect your supply chain? Can you meet your customers’ needs efficiently? How often will you need expedited freight to handle emergency situations? Will an inland port be the best area from which to service customers and distribute product?

6. Consider the port’s capabilities. Check if the inland port has the ability to expand and the manpower to execute your logistics needs — onloading and offloading products, for instance. Ports are often landlocked. Find out if the inland port can offer adequate space to expand if necessary. Know what freight handling options are available at the port, and their costs. What type of cranes or onloading/offloading capabilities, for example, does the port have? Can the equipment already in place easily be used to handle your products? What will it cost? If equipment is not in place, will the port allow you to use the necessary equipment? At what cost? It is vital to know how you can leverage the freight handling system the port currently uses.

7. Enlist the help of trade associations. Utilize existing networks to find help and best practices. The place to start is a trade association or port-focused organization. Check out Inland Rivers, Ports, and Terminals Inc.; the National Waterways Conference; the American Association of Port Authorities; or the Upper Mississippi, Illinois, and Missouri River Association. These organizations offer insight into the port industry and can help you stay abreast of current issues.

8. Review port management and operations. Take time to fully assess the port’s lease rates and terms. Also determine if the port favors short-term or long-term leases, or if you can purchase property at the port and build to your specifications. Investigate what types of shared services — trucking/rail lines, large conference rooms — might be available to your company. Check to see if the port includes you in its marketing materials, and/or gives you a presence on its web site.

9. Evaluate the region where the port is located. Fully examine the business climate — cost of doing business, available workforce, and quality-of-life issues — that you and your employees will find valuable.

10. Examine the companies currently operating at the port. Are they satisfied with the port and its operations? Note which companies could complement your business, and vice versa. Having a location in a port, which is often an industrial maritime development park, could serve as a catalyst for your company.

What do you guys think? Do you have any further suggestions?

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Michael Stolarczyk is currently Senior Director, of Business Development for Exel in their Westerville, Ohio General Office for the Americas. He is also on the Board of Advisors for West Virginia Universitys School of Business.

Michael’s Blog: http://blogonlog.blogspot.com

What do these firms, in different businesses, have in common? They carry too much inventory. While where they each have the extra inventory may differ-raw, WIP or finished, they have too much money tied up in inventory.

From accounting and financial views, inventory is an asset, a positive, for businesses. Inventory is a buffer against uncertainty. The cycle time from when inventory is needed until it is received, sold and sales payment is received is very important to company success and longevity. The longer the cycle time is, then the larger the amount of inventory that will be carried to balance against uncertainty.

Inventory turns are important. Think of it this way. The above firms are being paid every 90 days. That is essentially, what four turns really means. No one would want to get a paycheck that infrequently. That is a lot of capital tied up earning nothing while it sits unsold and an incredible float on capital. So why do businesses operate that way and accept such performance?

Inventory has a “limited shelf-life”. There is a window of opportunity to sell the product. Once that window closes then the sales value of it decreases and the profitability and inventory yield are not maximized. In addition to the capital issue, excess inventory influences service and operations. Unnecessary freight costs were expended to bring the products in. The inventory works against having a good warehouse layout to reduce order picking. It adds to labor costs. If the company does cycle counting, then such inventory is counted too often and is a wasted time effort. Too much inventory can also mean having a distribution center larger than is really needed to store the extra items. So the cost and service impact is large. There is also restricts agility to adjust quickly to changing conditions.

WHAT CAUSES EXCESS INVENTORY? Businesses do not decide to carry too much inventory as part of a strategic plan. Inventory increases creep in; it is not a deliberate business decision to tie up too much capital in inventory. The reasons for excess inventory vary but some of the common ones are:

*Loss of sales fear. The fear of not having an item to sell is stronger than the fear of not being able to sell the item. So a hedge factor to carry more items and more inventories is necessary. Also, sales forecasts can be overly optimistic.

*Price deals. Companies take advantage of lower prices for volumes in excess of what they need or will use in a reasonable time. But it is “too good of a deal to pass up” even if it sits forever in inventory. Economical purchases may actually be uneconomical.

*Write-offs. Businesses are hesitant to write off the inventory and take the hit on the profit and loss for the year.

*No measures. Some firms do not aggressively measure and manage inventory, inventory turns, inventory aging, inventory velocity or give inventory a less than adequate recognition. They may not even categorize as to “A”, “B” and “C”.

*Limited inventory planning. Planning is not based on demand management or similar technologies. Instead, it is more of an intuitive activity. With the long lead-times for items, especially those imported, this compounds the problem.

*Supplier performance. Suppliers are not managed even when suppliers fail to ship or deliver more than 25% of purchase orders on time. Firms build in extra time to receive their orders. They carry extra inventory to compensate for the supplier delivery issues. Poor supplier performance generates increased inventories because of its unreliability and extended time to deliver.

*No process. Buying and ordering inventory are transactions, a reaction to a need, perceived or real. It is a form of fire fighting. There are no company-wide strategic processes for customers, sourcing or tactical process for sales and operations planning. Procedures, whether for inventory or other purposes, may be used instead that reflect the lack of process(es). Expediting is another sign of no process. Inventory is used to compensate for the lack of process or for lack of execution.

*One approach fits all. The inventory strategy is not segmented to reflect differences in inventory as to profitability and turn velocity. Firms end up carrying too much inventory, especially for slower turning items-the “C” and “D” items.

A company can have too much inventory for than the reasons shown above. Often the inventory buildup is not done from one cause only. Instead, multiple causes create the over-inventory situation. The multiple reasons reflect the lack of underlying priority, process and control.

WHAT CAN BE DONE? Excess inventory does not have to be accepted as a way of doing business. Eliminating the causes of extra inventory is important. Some options include:

*Strategy and process. Develop a strategy and a process to manage inventory. This must come from the top down within the company. Without sustained executive commitment, this will be a frustrating endeavor. Some of the essentials should be-

- Measure inventory. You have to know where you are and where you are going. Develop metrics as to inventory velocity, aging and turns.

- Implement lean across the company. Excess inventory and additional time are waste and add no value to the product. Many departments can create non-value time and inventory. Lean is very similar to supply chain management with its emphasis on pull for product movement. Lean is a key tool to identifying and reducing unnecessary inventory.

- Look at the entire supply chain. While assessing the total supply chain, distinguish the inbound supply chain from the outbound supply chain in designing and implementing the strategy. Otherwise, the cycle time and resultant inventory are blurred. Also, develop multiple transport and stocking programs to reflect the segmentation of inventory. Firms that have supply chain management as part of the core competency and strategic focus perform better in controlling inventory across the supply chain.

Segment inventory by velocity and by profitability. Unbundle it to understand where inventory exist, why it is and how it occurs.

Make inventory part of the overall company direction with regard to its role in customers, sales and profits.

Implement a sales and operations planning program that ties to both customer and sourcing strategies.

- Compress time. Uncertainty-and inventory buffers-increase with time. Reduce the time from the need for inventory until it is sold. This is very important with lead times for critical items and for imports that have long transit times. Compression should occur both internal and external to the company.

- Develop reliability. Vagaries in the supply chain compound uncertainty and increase inventory. Reliability throughout the supply chain is imperative to reducing uncertainty and inventory.

- Be creative. Find what works for your company. Do not imitate what others do. Do not be restrained by existing company practices and “rules” that were developed for reasons that are long forgotten.

*Distribution network. Warehouse locations may have been established years ago under economic conditions that have changed. Many warehouses can increase the total inventory carried because of the extra safety stock. Too few can mean longer transport distances and can have more inventories in transit than on shelves. Determine the optimal network for today’s business.

*Supplier performance. Make it a key part of the inventory management and of the sourcing strategy. Manage purchase orders. There is much more than low-prices in vendor selection.

*Effect of global sourcing. Long transit times across the Pacific and other trade lanes affect the inventories that firms may carry. Analyze the impact of such sourcing and determine how to address the inventory impact.

*Outside assistance. There are two options here. There is the one-time help that can be provided by a supply chain management consulting firm. There is also the ongoing approach that can be provided by a 4PL or 3PL to manage the inbound or outbound supply chain. The 4PL should be a neutral party whose focus is supply chain management and does not bring a possible “conflict of interest” by wanting the firm’s freight or warehouse activity that some 3PLs do. 3PLs and 4PLs that can see the supply chain, not just freight or pallets, can be valuable partners.

CONCLUSION. Increasing inventory turns and velocity is critical to business profitability and survival. Reducing inventory and preventing buildup of unnecessary inventory is not a quick fix. It took time to get into the problem. It will take time to get out of it. In addition, it is easy to slip back into the same problem. It will take constant focus and determination.

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LTD provides logistics consulting for strategic and tactical needs. The scope of capabilities is broad–supply chain management, outsourcing, transportation, warehousing, inventory management, and more for both domestic and international needs. Clients include retailers, wholesalers/distributors, manufacturers, logistics service providers and 3PLs.

How can one equip Logistics to have foresight, be able to sense changes, respond to those changes and be adaptive to changes in the environment? These are hot topics in the Supply chain and Logistics world today. This article does not profess to address all components of creating ‘Intelligent Logistics’. However, it provides an introduction to the logisticians of the current thoughts and trends in the arena and opens avenues for enthusiasts to explore further.

The Four Pillars of Intelligent Logistics

Embedding “intelligence” into Logistics processes and systems involve building four robust pillars of Integrated planning and execution, Visibility, Collaboration and Analytics.
Intelligence in Planning and Execution

The foresight and responsiveness are essentials at all levels of the logistics – strategic planning, tactical planning, operational planning as well as execution. It is equally important to build strong linkages between planning and execution processes and systems to embed “smartness” into Logistics.

The strategic planning addresses such issues as network design in terms of plant, warehouse, partner facility locations and capacity planning based on the customer demand, supplier positions, transportation and other fulfillment costs. The periodicity may range from six months to five years. By its very name, strategic planning is supposed to be intelligent. However, in reality most strategic planning exercises neither embed foresight, nor create responsive networks. In the dynamic world of constantly escalating oil-prices (and hence fuel and transportation costs) and increasing demand-side and supply-side pressures, network planning needs to be almost continual; and create an adaptive network that can quickly respond to market changes.

Tactical planning addresses how best to use the existing facilities and assets for optimal customer service at least cost. It also includes ‘what-if’ sensitivity analysis and simulation techniques to sense the effects of delta changes in demand, supply, or network and helps respond better to changes.

Operational planning generates realistic inventory and shipment plans either based on constrained-optimization or heuristics. Historically, most operational planning engines have been batch-oriented. Then the transactional systems execute the plans generated by the batch engines. However, in the real world, orders keep changing, carriers reject tenders, inventory is not found in the warehouse due to discrepancies, or equipment breaks down on the road and so on. The uncertainties in the Logistics network are increasing both on the demand side and the supply side. On the demand side, orders would change more dynamically based on the real customer demand. On the supply side, Logistics networks are also lengthening with global supply chains.

A key ingredient of “smart” Logistics is to have a tightly integrated planning and execution. Batch-oriented optimization and transaction-oriented execution must be give way to ‘real-time optimization’ and ‘responsive execution’ with a closed loop feedback linking planning and execution.

Visibility

Visibility refers to true understanding of the customer demand, real-time track and trace of inventory at item level, and track and trace of shipments as well as alerting when events deviate from expectations. This visibility into orders (demand), inventory and shipments (supply) help sense the changes in demand and supply in near real-time and respond quickly to these changes. This will help reduce safety stocks and hence costs, improve customer service and make the Logistics network more adaptive. They will also help execute such best practices as cross-docking, in transit inventory merging, and delayed allocation strategies.

The key tools of visibility are:

• Track and trace within the enterprise through event monitoring engines
• Track and trace across partner network by receiving partner messages through EDI, XML or Web.
• Integration Hubs manage connections among heterogeneous systems located in multiple enterprises.
• Exception Detection and Alerting compares status messages with predefined metrics and workflows, sending alerts when pre-defined tolerances are violated.

Collaboration

Intra-enterprise and inter-enterprise Collaboration is closely related to visibility. It also extends beyond visibility into multiple levels of Collaboration, particularly for inter-enterprise collaborations.

At the lowest level of Transaction Automation, inter-enterprise Collaboration involves data and document exchange through EDI or Web. They will help automate no of otherwise manual transactions reducing the administrative costs, errors etc. Coupled with track and trace functions, these can help introduce some intelligence into the network by monitoring events and generating alerts.

At the next level of Collaboration, demand, inventory, schedules etc are shared, enabling better planning. This can help make all the parties “smarter” through better decision making.

True Collaboration involves re-engineered business processes across the partner network with closed loop planning and execution.
The integration of systems, processes and people across the network creates high velocity network that is lean, agile and adaptable to respond quickly to the changes in the environment. The cost of this true collaboration is falling dramatically with the advent of new web-based tools.
Retail and Consumer goods industries undertook a number of initiatives like CPFR (Collaborative Planning, Forecasting and Replenishment), QR (Quick Response), ECR (Efficient Consumer Response), CRP (Continuous Replenishment Programs), VMI (Vendor Managed Inventory), CMI (Co-Managed Inventory) etc in the last ten years or so to leverage inter-enterprise collaboration for creating responsive networks.

Analytics

Metrics are critical to an Intelligent Logistics Network. Real-time capturing of logistics metrics enables a performance-driven, responsive logistics network. 360 degree score cards, logistics dashboards, performance reporting, and ad hoc queries are some of the tools in this category. Six Sigma methodologies are also increasingly used in the supply chain and logistics domain creating goal oriented, performance driven, intelligent networks.

Near real-time analytical tools that provide incisive service and cost metrics help intelligent decision making. Analytics combined with six sigma methodologies also enable root cause analyses to address the core issues. Last month’s feature article talked about ‘Information Factory’. The logistics information factory provides an excellent infrastructure to enable Logistics analytics.

Conclusion

Injecting intelligence at all levels of the Logistics network has never been more critical than in today’s Demand-driven, Globalized supply networks. Affordable tools are available today for making the logistics networks “smarter” through Collaboration, Visibility and Analytics. There are still challenges in tightly integrating the planning and execution processes in a closed-loop, but that is clearly the direction for the Logistics industry.

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Michael Stolarczyk is currently Senior Director, of Business Development for Exel in their Westerville, Ohio General Office for the Americas. He is also on the Board of Advisors for West Virginia Universitys School of Business.

Michael’s Blog: http://blogonlog.blogspot.com

You don’t need the latest ERP package or other SCM software to improve your distribution center operations. True, technology plays its part as an enabler; however, the majority of the savings are found in an area often overlooked:
Processes (and yes, don’t forget those people behind them)!

As you add on more suppliers, SKUs, customers who generate more complex order requirements, your organization often works around the complexity that these challenges bring, leading to inefficient processes. The result? Higher error rates, lower productivity and late orders. Here are three process areas that can improve the situation, and they can be implemented using your current staff.

Process area #1: Inbound – everything begins here

Is your Inbound area a constant bottleneck? Why? Lack of appointment scheduling, poor pre-receipt planning and documentation, and incorrect purchase order information will bring any dock to a halt.

This is the source of problems that, if not corrected, will precipitate and multiply their effects throughout your operation (exponentially), creating inefficiencies and ultimately affecting your end customer. Eventually, you have to fix the problem (e.g. wrong item shipped) later adding even more cost. Why not fix the problem the first time around? Do you have documented processes for the following areas?

- Appointment scheduling

- Pre-receipt planning & document preparation

- Vehicle arrival & unloading procedures

- Quality control procedures

How well are they followed? Investing time to ensure that your associates are trained and aware of these processes will pay dividends later in the form of decreased credit invoices, less damages/returns and higher profitability.

Process area #2: Picking – the most costly activity in your operation

Since approximately 50% of laborbour hours are attributed to picking in a typical distribution centre, even incremental improvements will have a significant bottom-line impact. The largest component of picking time is travel time (the time it takes for the picker to get to the next pick slot). By reducing the travel time, the picker spends more time picking, less time traveling, thus, improving picking productivity. A number of solutions will facilitate this:

- ABC analysis to identify fast, medium and slow SKUs to re-profile layout

- Introducing flow rack for smaller items to free regular pallet slots

- Multi-level picking & shelving for very slow items

- Batch picking for small volume orders

How are new items slotted in the distribution center? Unless there is a defined process, usually everyone is “too busy” to do it properly with the end result being large traveling distances for pickers and a corresponding loss in productivity.

Process area # 3: Realistic Work Productivity Standards – must be set

One operation I have visited measured productivity as cost per case. While this is an important managerial-level metric, it does not translate well to the distribution center associates. For example, when ten receivers are scheduled in Inbound, but only seven are available due to illness or holidays, the cost per case will increase (full-time absent workers are still being paid) for that period; however, the productivity may actually increase due to fewer associates dealing with more volume. Thus, management will observe a decrease in productivity when it actually increases during that period. Simple logic, that is often ignored, or just plain missed! Consequently, this does not motivate the team to improve.

Instead, it is important to measure cases per hour and set a target for the month. Compare this to last year’s actual productivity and year to date. These are meaningful numbers that can, when tied to an incentive program, motivate the team to increase productivity. If you currently use a time and attendance system (TMS), you can easily modify the reporting outputs to include departmental productivity, whether it is Inbound, Putaway, Replenishment, Picking or Shipping. Once again, by having a process to measure and monitor productivity properly, realistic expectations can be communicated to all associates. Don’t forget about your people, people!

By implementing processes for the above three areas, distribution center operations will run more smoothly despite all the complexity that exists and continues to develop.

You know, it always comes down to people and process…yeah, yeah, I know…broken record. How about a few of you sharing your thoughts on these type of subjects!

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Michael Stolarczyk is currently Senior Director, of Business Development for Exel in their Westerville, Ohio General Office for the Americas. He is also on the Board of Advisors for West Virginia Universitys School of Business.

Michael’s Blog: http://blogonlog.blogspot.com

A typical apparel company, for example, might source fabric from China, manufacture garments in Malaysia, send them to Italy for custom design work, then ship final products to a 3PL warehouse in the United States for delivery to major department stores around the country.

And it must do all this in time to get a hot fashion item on store shelves before A-listers move on to the next trend. Good luck coordinating this multi-party process with phone, fax, e-mail, and spreadsheets.

The need for advanced solutions may seem obvious, but a surprising number of companies still have a long way to go when it comes to global supply chain technology sophistication.

On average, large companies report their global supply chains are only 50 percent as automated as their domestic supply chains.

The interesting news continues — only six percent qualify their global supply chains as highly automated, and a full 90 percent of all enterprises report their global supply chain technology is inadequate to provide timely information required for budget and cash-flow planning! This is the single most frustrating topic that I continue to harp on within BlogOnLog.
Companies claim they want supply chain visibility, but what they really need is fiscal visibility within their supply chain!

How did companies fall so behind? Who fell asleep at the wheel — supply chain managers? IT directors? Technology vendors? YES. YES. AND YES…but more important…their CEO and CFO are also asleep at the wheel!

The global supply chain has been relatively ignored because it was traditionally a small part of companies’ businesses. Companies focused their technology efforts on domestic applications instead. Then the world changed — business became globalized, and companies realized their IT systems are not set up to support that…nor are their fiscal models.

With international shipment volumes growing at a rapid clip, many companies have been caught off guard, and are now scrambling to plug the technology gap. Without automated systems or fiscal models to account for costs throughout the systems, and, in most cases, without additional staff, global supply chain managers face an uphill battle.

Global supply chains are more complex than domestic supply chains…which is a given…more parties are involved — contract manufacturers, 3PLs, a company’s own factories, customs agencies, brokers, and multiple carriers. That complexity is a major difference.

There is a bright spot in this picture. The global supply chain technology void affects logistics managers’ the ability to finally deliver crucial financial data — particularly for Sarbanes-Oxley compliance — CFOs/CFOs have taken notice and are now joining the technology crusade. Tying technology investments to a business case outside the supply chain often helps logisticians get the global commerce tools they need. The money trail doesn’t hurt either…

Once a /CEOCFO realizes a problem impacts financial performance and risk levels, it’s easier to push technology requests through the system. 3PL’s are a great platform to help create this fiscal knowledge.

After a company decides to invest in technology, the next question is whether to develop solutions in-house or partner with a technology provider or 3PL. Increasingly, organizations choose to forego proprietary solutions and seek outside help…3PL’s are the way to go!

Many companies still currently use in-house applications to manage their global supply chains, but many seeking to implement new technology say they least favor in-house solutions versus collaboration with 3PL’s.

These organizations plan to use either a best-of-breed on-demand or a licensed software vendor; an ERP vendor; or a 3PL’s technology solution to manage their global supply chain.

Most supply chain organizations haven’t had budgets to buy external technology. Now, companies realize multi-party collaborative practices are not a core competency for their internal IT organizations. So, they kick in the money…

Companies can spend two or three years building an in-house solution, or use an on-demand option and be up and running in two to three months. Before 3PL outsourcing, the choice was between building an internal solution or taking eight months to implement an installed system.

In that case, companies were often willing to wait the extra months to build in-house, but the two-year gap between an in-house and on-demand solution requires them rethink their strategy.

Companies that continue using in-house technology solutions also face the challenge of keeping up with the speed of developments — in both supply chain technology and global business practices. Keeping data from an increasing roster of partners connected and synchronized is a labor-intensive challenge — and, sometimes, a guessing game.

We are essentially in the early days of reinventing our business processes for globalization. many companies can’t build a technology solution today and be confident it will support their needs five years from now…the landscape is too riddled with uncertainty and risk.

What can companies do to combat technology inefficiencies? Pinpointing the area of their global supply chain that can benefit most from a quick technology hit is a good place to start. My suggestion is on how to fiscal account for the total supply chain…not just international inbound or domestic distribution…you got it…my favorite saying…from PO to PoP!

It is unrealistic to try to solve every problem at once. For most companies, advanced supply chain visibility, from the fiscal perspective, is the biggest need; for others, it is trade compliance enhancements, or collaboration-based systems.

It is an oversimplification to say technology is the magic fix for global logistics problems and will make a supply chain organization the corporate star….yeah, I know Mike…technology for technology’s sake is nothing…it has to have the people and process behind it!

A major retailer started out with global visibility technology, and was able to quicken cycle times and reduce inventory investment, and the CFO is so happy with the progress, he is now knocking on the global logistics director’s door, saying, “Why aren’t you moving faster to implement that compliance technology?”

So don’t be surprised if your CEO or CFO soon knocks on your door with a technology request. Pick up the phone and give me a call…we can collaborate on the solution!

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Michael Stolarczyk is currently Senior Director, of Business Development for Exel in their Westerville, Ohio General Office for the Americas. He is also on the Board of Advisors for West Virginia Universitys School of Business.

Michael’s Blog: http://blogonlog.blogspot.com

Supply chain management (SCM) is one of the key drivers in today’s business world with offshore sourcing, foreign competition and global markets. The responsiveness required to keep the inbound supply chain flowing with materials and products and to keep store shelves filled is demanding. SCM requires reducing costs, increasing inventory velocity and compressing cycle time; and some say these three may not be compatible or consistent.

Doing all this “and doing it well” takes creativity and management skill. However there is a factor that limits the design, development and implementation of such supply chains. That factor is accounting (ie; bean counting), and how it recognizes, and treats, logistics costs.
My view, is accounting is an impediment for logistics, whether for supply chain management, both international and domestic, for lean and for outsourcing. This is a fact, not because of accountants, but because companies simply do not understand how to fiscally account for their supply chain!

Generally accepted accounting principles create the foundation so that every company reports its financial data the same way. Or so they say…
This financial snapshot is consistent then from firm to firm (or it should be). hence, this makes analysis of the data and comparisons possible.

These accounting standards have a long history. They date back to Henry Ford and the Model A. Companies then may have been vertically integrated with a primary focus on domestic sales, sourcing and production. This business model has become nearly extinct, especially for large companies, that source internationally. As a result, accounting rules have not kept up with present business operations and practices.

Some differences with supply chain management and accounting are:

Process versus Transactions

SCM flows across the organization. As a process, it flows across many of the organization’s departments and boundaries. Accounting is transaction-oriented, with its focus on identifying and summarizing vertical sales and make-or-buy activities.

Organization Direction

Supply chain management is horizontal and crosses departments and organizational boundaries. Transactions are vertical and are consistent with organization silos.

Scope

SCM extends into suppliers and logistics service providers to gain inventory velocity and to reduce cycle time. Accounting stays within the company facilities and boundaries and looks inward.

Outward or Inward

Supply chain management looks both inward and outward to deal with suppliers, transport firms, warehouses and other logistics service providers. Collaboration is important when managing the complex, global supply chain. Accounting is traditional and focuses within the corporate boundaries.

Continuous versus Discrete

SCM is ongoing. Product is always flowing. Accounting looks at different summaries which create supply chain disconnects. Logistics costs are organized individually, not recognized at all, or recognized in different places.
For example, freight and warehouses show on the income statement and are recapped monthly.

Inventory appears on the balance sheet and is presented annually.

ARRRGH! I am already driving myself nuts with this post! Just think what its like in a multi-national organization!

So three key logistics elements are dissected and shown in different financial reports!

And nowhere does “actual time,” a vital business driver and the action that creates inventory and service, appear on any financial statement. Add time and to a great extent, this view of logistics costs makes accounting obsolete for supply chain management.

Dynamic versus Static

Supply chain management is constantly changing–as suppliers, customers, plants and warehouses, shipment sizes and order mix and as store locations change. This contrasts with accounting which has the historical perspective of what has already happened.
As a result, accounting does not understand changes in transportation costs, for example, because of changes in the distance inbound and outbound shipments must travel, or in the shipment size or in the mix of commodities being shipped. Or, for the time it takes…

These differences make it difficult to develop meaningful performance metrics for supply chain management that are recognized in the board room and that are aligned with the company strategic plan. Financial metrics, while commonly used, have limited application to supply chain management performance improvement.

For example, inventory velocity, inventory turns and inventory yield maximization (all time related) are important to achieving the best returns on inventory and on the capital that it represents.
Cycle time, from purchase order to sale or time within the total supply chain, are measure of company performance with strong bottom line implications. Yet none of these are part of traditional accounting measures which are rooted in the past. What about the present? What about the future?

Today’s business world is focused on the customer. The perfect customer order is a key performance metric for gaining and maintaining customers and for achieving deeper customer penetration. These are not standard, traditional financial measures!

Similarly developing unique supply chain programs that differentiate by A versus B versus C inventory, or by customer, or by product family segment, or any other delineator are not supported by accounting!

Financial standards do not readily recognize such stratifications.

Sourcing right decisions are also restricted by accounting which has blinders as to the potential impact of the outsourcing decision on the company and transforming its processes, operations and results.

These limitations also impact the success of lean program development and lean success. Waste, non-value added, actions do not conform to traditional accounting. As a result, time and inventory waste identification run counter to how accounting sees these manufacturing and supply chain processes and sub-processes.

Incremental and continuous improvement with its flow and pull are part of adapting to the new business model of faster and better…even less expensive. Unfortunately cost accounting practices are enablers of the old ways, not the new ways of business and business models.

Accounting professionals have recognized the limitations of accounting in today’s business. Activity based costing is one way they try to adjust to the new world. But ABC is not incorporated into income statements and balance sheets, which still reflect an antiquated way of summarizing business financials and performance. Frankly, most of the old boys on the board wouldn’t know how to read or interpret this new fiscal game plan anyway!

At some point, Accounting must step up and stop band-aiding a bad system. It must redefine, reinvent, and reinvigorate itself…so it can be part of the global business world.

Until that happens, companies will continue not to properly measure and improve their performance, operations and results. Their supply chains will be fragmented…just as their outdated financial documents are…

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Michael Stolarczyk is currently Senior Director, of Business Development for Exel in their Westerville, Ohio General Office for the Americas. He is also on the Board of Advisors for West Virginia Universitys School of Business.

Michael’s Blog: http://blogonlog.blogspot.com

Thus, goodwill building and corporate profitability are seriously dependent on it. As a discipline, supply chain management is gaining regard as more and more companies are recognizing the significance of managing the network of facilities and distribution options that facilitate procurement of raw materials, transformation of these raw materials into finished products, and the distribution of these finished products to the customers.

A supply chain exists in every company whether it is manufacturing products or offering services. However, its complexity varies greatly from business to business. For instance, a company providing services may have a lesser complex supply chain than that of a company manufacturing products. Supply chain management is undertaken basically to fulfill the goals of an organization. These goals can be both long term as well as short term. This term greatly influences the kind of decisions taken for supply chain management.

Supply Chain Management primarily encompasses the processes by which raw materials are acquired and used to manufacture the end products. It also includes the processes involved in the delivery of the finished goods, and the ability to process returned goods. Thus, the supply chain management basically covers the issues related to planning, sourcing, producing, delivering and servicing. Its fundamental purpose is to ensure that the products can be produced and delivered in an efficient and profitable manner.

The five primary elements which together comprise the Supply Chain Management are planning, sourcing, production, delivering, and accepting returns. Each of these elements is critical for a business to flourish.

The planning stage involves drawing up of strategic plans for the company. These plans or decisions are very critical for a company as they allow a company to develop a strategy for managing their production flow process. The process of sourcing which is an extension of the planning process also plays a significant part in deciding the profits a company is going to make. It is during this phase that the company decides from where to procure the raw materials needed for the production. The company has to select a supplier who gives it best quality raw material at the lowest possible prices, so as to maximize its profits and provide quality finished products to the consumers. Managing inventory of the goods and services a company receives from its suppliers is another very significant task involved in supply chain management.

After planning and sourcing a company has to start production. This is the most important step in a supply chain. It includes all the activities and decisions necessary for production, testing, packaging and preparation for delivery. Delivery is the next phase to consider. It is generally referred to as logistics or shipping. In this phase a company has to set up a proper delivery mechanism, under which he has to develop a network of warehouses, pick carriers to get products to customers and set up an invoicing system to receive payments. Last but not the least element of the Supply Chain Management is the returns process. Customers are not always satisfied with the products, thus, every company should have a network for receiving the returned goods and satisfying its customers.

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As a result, there are supply chains within each supply chain. With supply chains, the emphasis is on logistics because that is the vital driver of the supply chain.

The success of the chain depends on many things. How well and how clearly the key player in the chain, the large retailer/mass merchandiser or whoever, has defined what he is doing and why he is doing it that way. For suppliers located within the chain, this is important. There is no one standard universal chain. What you are dealing with are multiple, different supply chains and logistics processes and supply chains for each customer. That means developing agile, tailored logistics solutions to meet the requirements of each customer.

Supply chains work on a pull approach. This applies whether the product is made to stock or made to order. Each chain is really a series of buyers and sellers of products and services. That means that each link participant has his own objectives, and sometimes conflicting and objectives, which can work against supply chain effectiveness. The diversity of participants in the chain can create a complex and long process. Companies buy and sell and participate in the supply chain for their own reasons. This is an important and sometimes overlooked fundamental of developing a working logistics process, both for the entire chain and for each link in the chain. There must be collaboration between and among various buyers and sellers. Think of the supply chain as a relay race with good speed by each runner and a great handoff and exchange of the baton between runners.

The initial purpose of SCM was to reduce inefficiency in the supply chain. That inefficiency was defined with time and inventory. But that purpose was put on hold in the drive for cost reductions, often focusing on freight. Supply chain management is now transforming into its original purpose. Two key drivers for change are increased velocity for cycle time and inventory. These two are interconnected.

Cycle Time Velocity. Time is not on any financial statement; but its effect is. Inventory is not on the monthly P&L; it is on the balance sheet. The point being that gaining needed commitment to reduce cycle time may be difficult because it is not readily identified and measured. It also contributes to a customer service paradox. Accounting systems have their origins going back to the Ford Model A; that can add to the challenge in a globally competitive business world.

There are numerous financial and non-financial cycle time metrics, for example-on-time customer order delivery, manufacture to order complete, cash conversion cycle and days sales outstanding. A good one should be a measure of the length of time for a process, especially one that crosses the organization. The cycle time metric should be important to the company. It should recognize pain points or should add value and competitive advantage for the company.

A key process that crosses the organization is days in inventory that measures the number of days that inventory is held. Days-in- inventory is an important part of the cash conversion cycle. Reducing inventory levels and days of inventory improves profits, improves shareholder value and frees up needed capital. These please CEO, CFOs and shareholders.

This measure is often calculated as Inventory/(Cost of Goods Sold/365 Days). This method of calculation can be misleading and understate the total inventory in the supply chain. It excludes inventory that is on order and is being manufactured at suppliers and inventory that is in-transit. This is an omission that results in an understatement of the real days of inventory and the cash conversion cycle.

Retailers realize how critical the time from placement of purchase orders on suppliers until delivery is on inventories. With Section 404 of Sarbanes Oxley, adding this inbound portion to the calculation is valid for internal controls and risk assessment. Regardless of the technical issue of when title transfers, there is the company commitment and need for the material being ordered and shipped. Including the purchased order at supplier time and the in-transit time gives a better picture and understanding of what drives inventory levels, days and turns is useful for product lifecycle management (PLM).

This cycle time is total inventory days in the supply chain; and it is consistent with the length and definition of a supply chain. The supply chain cycle time runs from the purchase order placed on suppliers through to final placement on the store shelf or floor or to the customer’s warehouse. Now we can measure the real, total time for inventory and by including the inbound side where the clock actually starts to tick on inventory.

Studies have shown that manufacturers and wholesalers have over 60 days of inventory and that retailers have over 90 days of inventory capital tied up. These times do not include the entire inbound inventory in the supply chain. Real supply chain inventory is likely 25% higher. This is a very significant amount of capital tied up in inventory.

Inventory Velocity and Yield Management. Inventory is directly affected by time. Increased time adds to uncertainty and requires incredible demand management. For retailers, this is also shown with yield management

Yield management is often associated with the airline and hotel industries where reservation-based companies attempt to maximize revenue from fixed supply or capacity, seats on a flight or rooms in a hotel. The analysis can involve operations research tools, such as linear programming and simulations, to determine a pricing model at the micro level. It recognizes that price or revenue creating ability of the item in supply decreases with time.

Yield management is applicable in supply chain management when inventory is viewed as the supply whose yield is to be maximized. Inventory is key to success for retailers, manufacturers, wholesalers and distributors. Having the right inventory is also difficult and challenging. Insufficient inventory means lost sales opportunities. Too much inventory means markdowns-and reduced profits–to sell it. Firms working on thin margins especially feel such pain.

Ocean carriers practice a form of yield management balancing the timing and value from the service contract signing period through peak season when space may be at a premium regardless of pricing and into slack season where price reductions are given to freight forwarders to fill ships.

Many items, as retailers know, enjoy a short shelf life relative to demand to the price customers are willing to pay. Sales promotions, discounts and markdowns are almost common practices to draw customers. Firms that are in dynamic, volatile businesses, such as fashion and related, know the impact of short product life cycles and pricing decisions on the bottom line.

The operations research approach determines the “optimal” markdown(s). But this is somewhat of an after-the-fact approach. It does not address the underlying problem of demand planning and uncertainty and how to mitigate it. The length of the inbound supply chains has increased significantly with global sourcing. Longer chains have also meant longer times to produce and deliver products from suppliers.

This yield management driver realizes inventory velocity with its focus on supplying product and not on placing it at customers or in stores. It puts the focus where it belongs, at the beginning of the supply chain where product originates. Firms can better turn inventory from purchase orders into cash. Inventory that is in a long transit, inventory that sits in warehouses and inventory that sits on store shelves and floors does not increase in value with age. Inventory goes stale and loses value. It loses the sales window of opportunity. The only solution then left is price reduction.

Traditional procurement approaches focus on product price as does traditional logistics approaches that focus on freight price. The result of these pricing efficiency approaches is to place prices before inventory requirements by treating the product supply as two discrete events. They create discord in the development of an effective supply chain that can minimize time, inventory and cost while maximizing service and profits. The dual-price approach hinders the development of inventory management at suppliers to create yield management as a benefit of supply chain management by focusing on having the right inventory at the right quantity at the right place and at the right time. And the place to implement that is at the supply origins with suppliers.

Product and freight pricing emphases do not recognize yield management. They do not take yield management from being an analytical tool to being part of the supply chain practice and process. The impact is to trade-off product and freight prices for markdowns and lower profits.

Incorporating yield maximization of inventory beginning at the supplier level converts an operations research tool into a supply chain operations paradigm to manage the product and its flow. It expands the supply chain focus supplier management. It creates substantial benefit and competitive advantage. Yield management success requires supplier management in order to bridge between supply chain planning and supply chain execution.

IMPROVING SUPPLY CHAIN CYCLE TIME AND INVENTORY YIELD. Reducing supply chain cycle time means decreasing the days of inventory held and reducing the cash conversion cycle. This can mean hundreds of thousands of dollars, even millions, reduction in inventory and in carrying charges. In turn this is capital available for other uses. All parties in the supply chain must understand their importance in gaining these benefits. Improving cycle time also positions the retailer for greater inventory yields and faster turns. These impact shareholder value and service.

Reducing supply chain cycle time takes analysis and effort. Points to consider are:

• A supply chain is complex. The purpose of all this activity is to place product timely and correctly in stores or at customer facilities. It must be designed, directed and managed as a process, not as a series of order and shipping transactions. Pushing bad logistics processes and practices up or down the supply chain impedes time
• Product and information should flow. Operational effectiveness depends on process, technology and people that cross internally within the company and externally with suppliers and customers.
• The process should be assessed for gaps and redundancies. Measure the time required in each action and the reason for the action. Watch for organizational dysfunction that can creep in and add unnecessary time.
• Inventory is created as a buffer for uncertainty. Uncertainty increases, almost exponentially, as the time required to position it correctly increases. So inventory increases as time increases.
• Tradeoffs do exist between time (and inventory) and cost. Global sourcing adds to time and to the inventory that must be carried because of it.
• External factors exist that impact time and may be beyond control to be reduced. Homeland security for importers is one such factor. It adds to how promptly suppliers located outside the U.S. can ship orders. Logistics infrastructure in sourcing countries is another factor that can add time and impede the flow of product from suppliers’ facilities to ports and airports.
• Besides the product supply chain, there is also a financial supply chain. This second chain can and does affect the timely flow of product.

With the extended supply chain, there are numerous places to extend, not reduce, supply chain cycle time and inventory. Likewise there are key points to concentrate on for reducing time.

Key ways to reduce time are:

• Manage vendor performance. This is a critical requirement for reducing supply chain cycle time. Suppliers, at the supply chain source, have incredible impact on the supply chain as to time, inventory and costs, impact that goes far beyond pricing and placing purchase orders. Visibility of purchase orders, at suppliers, in-transit and at each step in the chain, from vendor’s plant to delivery at the warehouse, store or customer is vital.
• Integrate up and down the supply chain, both external and internal. This is mandatory. Non-integration adds to supply chain time and the lack of responsiveness and dead spots in the cycle time. Integrate demand forecasting or other inventory planning with suppliers for their build plans. Integrate purchase orders into transport load planning. Everyone should be working from the same data, information and system or platform. Manufacturers integrate through the production process.

Transferring data up and down the chain is not enough. Data is not information. To collect, analyze, and forward data takes time. Suppliers and service providers then reenter the data into their systems. In turn they do this to their suppliers. All this quietly adds to cycle time. Conversely, integration reduces time and increases accuracy.

Integration may not be readily and easily doable with all parties in the supply chain. Do it with key suppliers and service providers, key as to volume or critical products, parts or needs. Have key suppliers integrate with their key suppliers so the benefit ripples through the supply pipeline.

• Collaborate with key suppliers and service providers. Work together as partners and be open to the mutual exchange. Sending procedures and demanding compliance with requirements is not collaboration. Work to align the process between both parties so that if flows smoothly and with minimal time.
• Analyze how inventory moves and where inventory sits or is transferred for opportunities to move it more quickly and with fewer handlings. Improvements are possible with:

  Warehouse / distribution network. Where warehouses are located as to time from stores or customers or suppliers impacts supply chain cycle time by becoming fixed repositories based on needs that may be outdated.

  Multi-tier inbound logistics approach. What modes, carriers, service and ports are used can reduce transit time and increase inventory and cash conversion velocities. Inventory in transit is not inventory available for sell. Having a different approach for A inventory items (and some B items)–as compared to many B items and C items–puts time emphasis where needed.

  Bypassing the distribution network where possible to reduce time. Three options to do this are:

  • Ship inbound containers direct to store or customer.
  • Use a transfer facility at or near a port(s) to quickly unload containers and transfer directly to needed destinations.
  • Allocate inventory in transit and then cross-dock containers at a transfer facility at or near the port or at a distribution center.
  • Implement technology. This is a necessity; it is a process enabler. However technology by itself will not result in needed improvements; it is not a silver bullet that solves a flawed process. Technology should be used across the supply chain enterprise, both internal and external. It is a key to gaining much needed supply chain visibility. Such visibility is needed for multi-tier inbound and bypass the distribution network programs.

For technology, remember:

Global suppliers and transport providers cannot be readily managed with emails. Technology is needed.
• Supply chain complexity and scope may require more than one software be used for effective control.
• Supplier management is directing and controlling supplier performance. It looks at the timing of product, the quantities, how and where delivered, product mix and more. The intent is to maximize yield.
• Portals provide tracking useful tracking information and provide shipment visibility. But they are an after-the-fact tool and do not manage inventory or time.
• Tracking purchase orders and contents of an inbound container has great value as compared to just tracking a container number. Visibility into the container sets the stage for significant abilities to reduce time and inventory.
• Converting sales-point of sales (POS)-data into replenishment orders on warehouses and, in turn, into purchase orders on suppliers is critical.
• Supply chain execution technology may be the most valuable of the technology applications. It is a vital to integration and collaboration.
• Ease of connectivity-web enabled, interfaces and mobile access-is important.
• Maximum supply chain process coverage-order management, transportation, distribution, warehousing, vendor, finance and more-is important to directing and managing the process and reducing time and inventory.
• Event management and exception management capabilities should be part of the technology used; they empower control of the process.

CONCLUSION. Increasing cycle time velocity and improving inventory yield begins with supplier management. Effective supplier management is based on technology, process and people. Technology is how purchase orders are placed on supplier, via the Internet, EDI or other. It is supply chain execution. More importantly it is how purchase orders and suppliers and managed with event management and exception management. The technology enables revising orders, their priorities, their style and other mixes, their timing, quantities and more. Technology gives visibility to directing and controlling supplier performance and what is in the supply chain, including what is happening with transport and other logistics service providers.

Process takes purchase orders from being transactions to being part of a process that flows through the organization. That process enables the linking of all parts of the supply chain, the integration within the company and between trading partners. It gives the dynamics to controlling product flow and inventory positioning. That control is key to placing the right inventory, right as to quantity and timing and location, so as to achieve higher price yield.

People are logistics personnel positioned in China, India or wherever your suppliers are located. They speak the same language and are in the same time zone as suppliers. They are the day-to-day operational spears that make process and technology work. Global supply chains cannot be managed with emails. Managing suppliers also requires people.

Time and inventory yield improvements increase profits, shareholder value and customer service and retention.

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LTD provides logistics consulting for strategic and tactical needs. The scope of capabilities is broad–supply chain management, outsourcing, transportation, warehousing, inventory management, and more for both domestic and international needs. Clients include retailers, wholesalers/distributors, manufacturers, logistics service providers and 3PLs.

3PLs, whether they are international or domestic, whether their corporate roots are forwarding, ocean transport, warehousing, trucking, customs brokerage or other, including shippers associations and logistics centers, struggle with common marketing and competitive issues.

They compete in a proliferated market with little brand identification. Firms bid for business, making price the prime delineator, for providing a service. Competitive advantage and competitive excellence are then defined by the lowest bid. Often they are kept in a price squeeze by customers or are asked to expand their portfolio of capabilities into services beyond the original bid. These outsourced logistics service providers may feel that it they have to do this to keep business and to grow. This is a stagnating trap. 3PLS must break out of the competitive gridlock, differentiate themselves and take it to the next level. It is not easy, but here is what leading 3PLs are doing:

For years, retailers, wholesalers, and manufacturers have tired to define their core competencies. Core competencies were held to be central to the company strategy. In some cases, supply chain management (SCM) was not held to be a core competency. Such companies often viewed themselves as marketing or sales or operations firms, not supply chain management firms. They failed to realize that SCM is a process that crosses their entire organization and expands into their customers and into their suppliers. Since supply chain management was not held as essential to business success, they looked at outsourcing as a way to reduce costs, not improve their company with supply chain management. This outsourcing approach took on a life of its own as the approach to outsourcing and became the foundation of the present way 3PLs approach customers and their own business.

Against this background, 3PLs need to see the short-sightedness of their business model and how it is forces them to become commodity-service providers, which is what their parent company is. Remembering that the parent company began the 3PL to move away from their price-driven, profit-squeezed commodity service, the need to take it to the next level is even more important.

The 3PL competitive landscape is vaguely differentiated. Many firms are seemingly to do the same thing. Such a congealed market further erodes profits and drives firms toward being a commodity service. In addition, 3PLs contribute to this market situation with their emphasis on growth, with volume as the business driver. Growth for the sake of growth–getting more containers or having more pallets–is the driver for many outsourced logistics service providers.

Given such economic reality, 3PLs, to be successful, must separate from the 3PL pack, define their business model and create brand identity. Firms that stand pat and do not make the change face slow growth with reduced profits.

Key steps to achieving the new model include:

KNOW THE CUSTOMER AND THE MARKET. Beyond what is in RFPs and the price issue, firms need to know what customers really want and value. This is important to determining who the 3PL should be and laying the foundation of their business. “It” defines and encompasses who you are and how you are to deal with. This is the complete package.

Determining what customers want is not easy. Supply chain management and its segments have varying importance to different industries and to firms. Understanding this is essential to where the 3PL is to go and how it is to get there. It sets the framework to knowing customers and their supply chain value propositions.

Look at successful businesses outside of logistics. What airline or computer manufacturer or grocery chain or internet search engine is successful-and why? The reason may vary within the respective industries, but there is something that makes a firm distinctive and which brands and positions it in the marketplace.

Customers are looking to outsource for a reason. They know there are risks with outsourcing with the change itself and with possible failure. And essential to that outsourcing is the value they are seeking. Value goes beyond a single capability, such as low container rates or web tracking of containers.

A 3PL’s value and value proposition, given the market it competes for, may be the ease with which customers can do business with you. This can be the complete package from introduction, through bid response, implementation, customer responsiveness, information technology, getting containers and chassis, getting on ships, moving containers through ports, delivery appointments, alerting customers of potential problems with suppliers or with other logistics service providers, problem resolution, billing, refunds, claims resolution, advising them of potential operations improvements in their company and more. Or it can focus on the select multiple, key processes and integrating them into a transparent, integrated operation.

Or the value proposition may be the 3PL’s knowledge and understanding of supply chain management, not just shipping or warehousing. It becomes a part of the customer with real world expertise. This is especially relevant to a customer who has supply chain management as both a strategic requirement and core competency. The 3PL takes a different tack on collaboration by being an extended supply chain management resource. For example, it may develop carrier routings based on required inventory velocity or cycle times using faster sailing schedule options where required and lesser where that works. This routing practice is dynamic and is based on seasonal or other criteria with regards key supply chain metrics of which the transit time is one component of the bigger supply chain picture.

Or the value proposition may be low cost freight selling into a commodity industry. This is a special niche. It requires knowing the commodity market being sold in to whether it is a type of grain, steel or other item. The hidden denominator may be timely delivering shipments to meet the sales order and letter of credit. Low cost and on-time deliveries are a unique value.

The key point is to give customers what they want in their particular industries, be unique. This seems like standard advice, but it is not always practiced in the pursuit of growth. A common approach across industries does not develop the mature relationships and mutual synergies that distinguish one 3PL from another. Mature is not the same as how many years the 3PL and his customer co-exist; it reflects the depth it extends into both organizations. One size does not fit all. Something distinct is needed.

DELIVER THE VALUE. Knowing the customer is the first step. Developing the value proposition and delivering the value is the second. The company must:

• Determine the integrated processes required. Each value approach has different key processes which must be integrated. Otherwise each process functions as stand-alone tasks. At the minimum there must be a 3PL version of Sales and Operations Planning (S&OP) that manufacturers and other firms use. Identifying and linking the strategic and tactical processes is not a once-and-done effort. It must be ongoing and must change and improve going forward. Standing still is not an option with a value model based 3PL.
• Determine the organization required. This has a two-fold meaning as to organization design and staffing of the organization. The traditional pyramid organization stifles integrated processes. Success may require that the 3PL design its organization to complement its value model instead of trying to force the value model onto the standard organization chart. An organization focused on its process may be flat relatively speaking reflecting that processes cross functions. Also, each organization segment may be defined by its process role as compare to the functional, traditional “sales”, “operations”, “finance”, etc. Such an organization design, in turn, may revise the skills required of the people in the organization with being broad across the company so that they can work well with strategic customers and potential customers.
• Determine the technology required. This applies to the external and internal usage. Customers have different needs as to information and how that information is presented, manipulated and used. Different groups within the customers’ organizations also have different needs which should be recognized and met. Groups within the 3PL, especially for the process-focused, have their own information needs, some of which should mirror what the customers’ do and some of which is required for integrated uses within the 3PL.

Delivering the new value model is a culture change that extends beyond normal change management issues. This topic cannot be overlooked for successful application of the determined business approach. Training must be extensive and reinforced.

CONCLUSION. Successful 3PLs must develop a value based model. They need to know their customer and market and deliver a new value to customers. This is needed to create competitive advantage and excellence and brand identity. It is a way to separate themselves from the mass of other competitors who seem destined to create a commodity service to an industry that was meant not to be a commodity service. There will be significant growth and profitability for those firms that do it. This has happened in other industries and helped firms set themselves apart in the minds of customers and in the market. 3PLs need to do the same.

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LTD provides logistics consulting for strategic and tactical needs. The scope of capabilities is broad–supply chain management, outsourcing, transportation, warehousing, inventory management, and more for both domestic and international needs. Clients include retailers, wholesalers/distributors, manufacturers, logistics service providers and 3PLs.